The U.K. economy has hit a stumbling block, slipping into a technical recession at the end of last year. According to initial figures from the Office for National Statistics, the U.K. gross domestic product shrunk by 0.3% in the final three months of 2023, marking the second consecutive quarterly decline.
While there isn’t an official definition of a recession, two straight quarters of negative growth is considered a technical recession. Economists had predicted a slightly better outcome, with a consensus forecast of -0.1% for the October to December period. All three main sectors of the economy contracted in the fourth quarter, with declines of 0.2% in services, 1% in production, and 1.3% in construction output.
For the entire year of 2023, the British GDP is estimated to have only increased by 0.1% compared to 2022. In December alone, output shrank by 0.1%. Finance Minister Jeremy Hunt attributed the challenging economic conditions to high inflation, which is forcing the Bank of England to maintain firm interest rates and stymie economic growth.
However, Hunt pointed to some encouraging signs, noting that forecasters agree that growth will strengthen over the next few years, wages are rising faster than prices, mortgage rates are down, and unemployment remains low. Though inflation has decreased in the U.K., it still remains above the Bank of England’s 2% target, squeezing household finances, with a year-on-year consumer price index reading at 4% in January.
Marcus Brookes, chief investment officer at Quilter Investors, suggested that the recession may be “shallow and short-lived,” reflecting temporary factors such as high inflation, structural weaknesses in the labor market, and adverse weather conditions. He emphasized that some of these hindrances are already easing, and over the coming months, inflation is expected to fall, potentially easing the pressure on U.K. households and supporting the recovery of the consumer-driven economy.
Neil Birrell, chief investment officer at Premier Miton Investors, expressed some concern over economic strength, but noted that there is room to cut interest rates if the current trend in inflation and growth accelerates.
The U.K. economy may be facing tough times, but with hopeful prospects for recovery, there is light at the end of the tunnel. The road ahead may be challenging, but experts believe that the U.K. has the potential to bounce back. As we continue to navigate the uncertain economic landscape, it’s important to remain cautiously optimistic and look for opportunities for growth and resilience.
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